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The Tax Court's second decision in Strangi has received much attention and a fair amount of criticism. From a practical stand-point, however, taxpayers and their advisors must be prepared to live with the consequences of this opinion, which may have a widespread impact. For those practitioners who decide to accept (or at least accommodate) Strangi II, several strategies are available for dealing with the court's reasoning, depending on the client's goals and temperament.
Although several Section 2036(a)1 family limited partnership (FLP) decisions have been issued2 since the Fifth Circuit remanded Estate of Strangi, 115 TC 478 (2000), aff'd in part and rev'd in part 293 F.3d 279, 89 AFTR2d 2002-2977 (CA-5,2002) (collectively, "Strangi I"), no Section 2036(a) decision had been as widely anticipated as the May 20th Tax Court ruling in Estate of Strangi, TCM 2003-145 (2003) ("Strangi II"). Practitioners rightly expected the decision to solidify developing law under Section 2036(a)(1) and, perhaps more important, anticipated material guidance as to the scope and reach of Section 2036(a)(2) and the protection afforded by Byrum, 408 U.S. 125, 30 AFTR2d 72-5811 (1972).3 Strangi II speaks loudly-but not favorably-on both points. The following discussion briefly looks at Strangi II4 and then focuses on practical planning alternatives in light of the decision.5
KEY POSITIONS TAKEN IN STRANGI II
The Tax Court's decision in Strangi II struck at the heart of FLP planning, i.e., the senior generation's ability to retain some level of management control over FLP assets, by taking both an exceedingly narrow view of Byrum's applicability to FLPs and an expansive view of Section 2036(a). Its key positions are as follows:
* In order to qualify for the "Byrum fiduciary defense,"6 a FLP must have significant unrelated partners and some type of underlying operating business.7
* The lack of an intervening trust distanced the Strangi FLP (SFLP) arrangement from Byrum.
* The decedent retained a Section 2036(a)(2) right to designate who would receive income by virtue of his retained "sole discretion" to make distributions from SFLP.8
* The decedents retained right to participate in SFLP termination decisions ran afoul of Section 2036(a)(2).
* Poor operational facts and testamentary motives resulted in Section 2036(a)(1) exposure.9
* The court suggested "inclusion of the contributed property [was required] under...